Unit 1 Topic 6 Flashcards
What is APR?
Annual percentage rate - the total cost of borrowing over one year, including the interest charged and any fees.
What does it mean to perform a balance transfer?
Moving the balance (total amount owed) on a card from one card provider to another.
What is the CVV (card verification value)?
Three numbers on the back of a credit or debit card. This is a security measure designed to prevent fraudulent use of the card by someone other than the card holder.
What is a cashback card?
A type of card that gives back to the cardholder a percentage of the value of transactions made with the card in the form of cash.
What is a charge card?
A credit card that must be repaid in full every month.
What is meant by consumer credit?
Another term used for borrowing.
Explain the cost of borrowing
Also called ‘cost of credit’. This is the total amount that the borrower will be charged including interest and any fees. For person loaned and credit card borrowing the cost over a 12 month period must be quoted - the APR.
What is a credit agreement?
The formal agreement between a provider and a borrower setting out the amount borrowed, the interest charged, the arrangements for repayment and any other terms and conditions.
What is a credit card?
A card that allows the holder to make purchases face-to-face, online or over the phone, and to withdraw cash from an ATM. Unlike a debit card, where the money is taken from the holder’s own account, transactions are paid by the card provider. The card holder relays the amount owed to the provider either in one payment or instalments. The provider charges interest on cash withdrawals from the time the withdrawal is made and on purchases after a certain period.
What is credit history?
A record of money borrowed and repaid by an individual. These records are held by credit reference agencies and providers will check the individual’s credit history when a prospective customer applies for a borrowing product.
What is a credit union?
A mutual organisation that provides a range of financial products to members, eg savings accounts and personal loans. Members of a credit union must share a common bond.
What is EAR?
Equivalent annual rate - the cost of borrowing using an overdraft.
What is a mortgage?
A loan taken out to pay for property, usually over a long term such as 25 years.
What is a payday loan?
A loan designed to be taken out only for a very short period, which charges a very high APR.
Describe payment allocation
The order in which a card provider uses money paid into an account to pay off the amount outstanding.
What is a personal loan?
A product that allows someone to borrow a fixed amount over a fixed period at a fixed rate of interest.
What is a store card?
A card issued by a retailer that the holder can use to make purchases within that store or group of stores. As with a credit card, the amount owing is paid off at a later date, either in one payment or in instalments, and interest is charged on the amount owed.
Explain borrowing that’s unsecured
The provider doesn’t have rights over any of the borrower’s goods if the borrower cannot repay the debt.
Name 2 examples of informal borrowing
Between family
Between friends
You have to be aged 18 years or older before you can borrow from a provider. True or false?
True
What is the term for the contract entered between a borrower and a provider?
A credit agreement
Name 4 factors to consider when borrowing money
What they can afford to repay
The costs and risks of different borrowing methods
How long they need to borrow for
How they apply for and manage the debt
Name 3 factors that a provider would take into account before making a product available
The type of borrowing
The personal financial circumstances of the borrower
Their history of repaying previous borrowing products
Describe a ‘cooling off’ period
A ‘cooling off’ period is a 14 day period where people who take out credit cards or personal loans have time to change their minds, cancel the agreement and return the card or the loan without any penalties.
How long does a ‘cooling off’ period last for?
The ‘cooling off’ period lasts for 14 days and starts from the date that the loan agreement was signed or the date that the customer received a copy of the agreement, whichever is later.
What do the regulations that implement the consumer credit directive 2008 require providers to quote?
An APR in adverts for borrowing products.
How often are overdraft interest rates calculated?
On a daily basis.
Name a cost of going overdrawn
Unpaid transaction fee.
Name 3 ways in which current account holders can avoid unauthorised overdraft costs
Sign up for an alert service from their bank that sends a text message when the account balance is below a set amount or a large transaction has been received for payment
Check their account balance regularly
Choose a basic bank account as their current account
Name the 4 parties that are involved when people use a credit card
The cardholder
The merchant
The merchant’s bank (the acquirer)
The cardholder’s bank (the issuer)
A typical credit card offers interest free credit for up to 56 days (depending on when the next statement is due). True or false?
True
Name 4 fees that can be charged on a credit card
Annual subscription fees
Late payment fees charged when the cardholder doesn’t make any repayments by the payment due date on the statement
Over-limit fees charged when the cardholder makes transactions that take the total amount borrowed over their credit limit
Cash advance fee charged when cash is withdrawn on the card
Name the 7 types of credit card
Low APR Cards
Cashback Cards
Reward Cards
Charity donation cards
First credit cards
Cards with low costs for foreign transactions
Gold, Platinum and Black credit cards
Who are low APR card usually available to?
People with a certain level of income and/or a good history of repaying borrowing on time.
Who are low APR cards attractive to?
People who want to borrow and spread the cost of repayment over several months because the interest charged is lower compared to other credit cards.
Why’re people who have never had a credit card before likely to be offered a higher APR and lower credit limit than others?
Because the issuer doesn’t know how they’d manage their borrowing.
Who are Gold, Platinum and Black credit cards offered to?
People on higher incomes.
Name 2 benefits of Gold, Platinum and Black credit cards
Travel Insurance
Entry to exclusive airport lounges
A personal assistant service
Why do APRs charged on credit cards tend to be higher than those charged on a loan?
Because it’s more risky for the provider.
Name the type of credit card that doesn’t charge interest and doesn’t have an APR
Charge Cards
What is a fixed APR?
A fixed APR is an interest rate that is guaranteed not to change during the life of the loan or credit facility.
Name one factor that may affect the rate of the APR a lender is charged
How much you want to borrow.
Name 5 factors to consider when choosing a product
How much they wish to borrow
What they can afford to repay
When they plan to repay
What the different borrowing options are
What the costs of the different options are
State 3 advantages of using credit cards
Offered by a range of providers
Accepted by most providers
Chip+pin identification and CVV (security)
Wide variety of cards
Allows people to borrow without added interest
Name 3 disadvantages of using credit cards
Potential for extra charges
Potential risk of getting trapped in debt
Limited use (drawing cash may cost a fee)
Could potentially damage credit score
